cmartenson's Blog

In each of the years 2008, 2009, and 2010, significant worries emerged that Western nations might attack Iran. Here again in 2012, similar concerns are once again at the surface.

Why revisit this topic again? Simply because if actions against Iran trigger a shutdown of the Strait of Hormuz, through which 40% of the world's daily sea-borne oil passes, oil prices will spike, the world's teetering economy will slump, and the arrival of the next financial emergency will be hastened. Even if the strait remains open but Iran is blocked from being an oil exporter for a period of time, it bears mentioning that Iran is the third largest exporter of oil in the world after Saudi Arabia and Russia.  read more »

There are clear signs of a liquidity crunch in the asset markets right now, and the question I keep hearing is, Is this 2008 all over again?

No, it’s worse. Much worse.

In 2008 there was a lot more faith and optimism upon which to draw. But both have been squandered to significant degrees by feckless regulators and authorities who failed to properly address any of the root causes of the first crisis even as they slathered layer after layer of thin-air money over many of the symptoms.

Anyone who has paid attention knows that those "magic potions" proved to be anything but. Not only are the root causes still with us (too much debt, vast regional financial imbalances, and high energy prices), but they have actually grown worse the entire time.

As always, we have no idea exactly what is going to happen and when, but we can track the various stresses and strains, noting that more and wider fingers of instability increase the risk of a major event. Heading into 2012, there's enough data to warrant maintaining an extremely cautious stance regarding holding onto one's wealth and increasing one's preparations towards resilience.

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What we care about most here is helping people adjust and adapt -- happily, profitably, and safely -- to what is likely to be a very different future.

Our framework centers on the idea that humanity is facing a set of predicaments quite unlike anything else in the history books. Because this time there are no borders to cross in search of safety; the entire world is involved. On a global basis, we've never experienced collective debt loads of this magnitude. Never before has an entire set of intertwined currency systems -- all debt-based money -- collectively been backed by nothing more than the hope of a larger future, and never before have this many people had to figure out how to move from more-concentrated to less-concentrated energy sources (from fossil fuels to sun- and wind-based alternatives). 

The convergence of exponential trends in population, energy depletion, debt accumulation, and an economic model that is hooked on growth will combine to produce quite an interesting, if not challenging and disruptive, future. The funny thing about complex systems is that they are unpredictable, and therefore preparing for what may come is a non-trivial (yet absolutely essential) task.  read more »

Around here we like to track things from the outside in, as the initial movements at the periphery tend to give us an early warning of when things might go wrong at the center. It is always the marginal country, weakest stock in a sector, or fringe population that gives us the early warning that trouble is afoot. For example, rising food stamp utilization and poverty levels in the US indicate that economic hardship is progressing from the lower socioeconomic levels up towards the center -- that is, from the outside in.

That exact pattern is now playing out in Europe, although arguably the earliest trouble was detected with the severe weakness seen in the eastern European countries nearly two years ago. 

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On Friday, October 7th, a beautiful blue-sky and warm-ish October day, I went to Zuccotti Park in NYC with Livio Sanchez (film editor) and Debby Brand (camera operator) to see firsthand what Occupy Wall Street was all about and record what we could.

What we found were people united by a sense that our national narrative is off course and that resentment over the patent unfairness of our current system is building. Perhaps the most common expression we found was that people, to varying degrees, thought that there was something systemically wrong.

Because of this widespread view of ‘everything being wrong,’ there was, naturally, no single message or thing around which everyone had gathered. Instead, the view was simply that the system being discussed -- political, capitalist, economic, or monetary -- was broken.

When you hold such a view, there’s really no ‘ask’ that makes sense. If the political system is irretrievably in the clutches of special interests, then voting new members into that system is perceived to be a waste of effort.

The short video below (less than four minutes) captures well what we observed:

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I do not toss around the idea of a market crash lightly.  If you've been following me long enough, you know that only in very rare instances do I issue a cautionary Alert (I've only issued four since my website launched in 2008), and I am generally not given to hyperbole.

Let's be clear: I'm not issuing an Alert at this time. But I am concerned that a materially adverse disruption to the financial markets is increasingly likely in the near future.

Perhaps a definition will be helpful as we begin. A 'market crash' is an event where there are no bids to meet a wall of selling. The actual amount of the percentage decline is less important to note than the amount of chaos, or loss of control, that a given market experiences. Some like to say that a market downdraft requires a decline of 10%, or maybe even 15% or 20% (or more), in order to qualify as a 'crash.' For me, the key factor is not so much the amount of the decline, but the pace of the decline.

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I have recently gotten in great shape, have lost a lot of weight, and am writing this to preempt any thoughts that I may be in ill health due to a sudden and pronounced loss of weight. Not only am I healthy, I am in the best physical condition in years. 

This is a before and after story. 

I had been working very long hours for years following world news, preparing the Crash Course, writing the book, and running a small business essentially solo, for years. Unsurprisingly, I found myself with the sort of body one might predict for someone who sat behind a computer for up to 14 hours a day, day after day. 

And then something happened.

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The risk faced by those who are analyzing macro trends is sounding like a broken record. For those younger readers who have no idea what that phrase means, imagine an mp3 song that will stick on and endlessly repeat a random segment of the song you are listening to until you give your device a sharp knock on the side. That's what a broken record sounded like.

The world economy is on the ropes, and it won't ever recover, at least not to anything resembling its recent past. Neither the gleeful housing bubble nor the free-flowing credit that enabled that side bubble to emerge will return. The resources simply do not exist to repeat that final orgy of consumption. A new reality is upon us, and while -- fortunately -- more and more people are choosing to face our predicament rather than pretend the current risks and challenges do not really exist, the absolute numbers of such forerunners are still small, and for the most part they don't include any of our political leaders.

The macro trends of worsening public and private debt loads, a looming and unaddressed Peak Oil threat, exponentially increasing global population, resource depletion, and an all-too-human tendency to use the money printing machine to deal with tough economic problems all remain pointed firmly towards an uncomfortable conclusion: There's a future of less in store for most people.

Our best hope is for a negotiated decline to lower levels of economic activity that allow us to gracefully adjust our expectations to a new and lower level consumption that offers an even more enjoyable and purpose-filled existence. Our worst fear is that a stubborn insistence on business-as-usual by our leadership leads to a future shaped by disaster rather than design.

The fundamental issue is this: You can't solve a problem rooted in too much debt with more debt. It just doesn't pencil out.

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I've been asked to comment on the work of a few noted deflationists who are calling for a top in commodity prices here. Their argument is pretty clear cut: Because inflation is a function of available money plus credit (their definition), and because credit has fallen, deflation is what comes next. When looking about for things to deflate in price, commodities are an obvious candidate for attention because they have risen so much over the past decade.

In this view, three things have to be true:

1. Demand for commodities has to fall below supply. After all, as long as demand exceeds supply, prices will typically rise.
2. Money, including credit that would normally be used to buy commodities, has to shrink. That's the definition of deflation that we're analyzing here.
3. People's preference for money has to be greater than their preference for 'things,' with commodities being very obvious 'things.' That is, faith in money has to be there or people will prefer to store their wealth elsewhere.

These are all just versions of the old supply/demand argument for commodity prices, except that our consideration also includes the important element of the Austrian economic view of demand for money.

There are several reasons why I think there are serious holes in each of these conditions.  read more »

Exactly 40 years ago today, on August 15^th 1971, the US dollar was released from the cruel tethers of an international gold standard. Today, we find notable monetary authorities seeking its return.

In the middle of a lengthy ~2,500 word speech in which Nixon sought to stabilize prices by implementing price controls and stabilize foreign trade by imposing tariffs, he slipped in these 100 words that sought to stabilize the dollar by going off the gold standard:

In recent weeks, the speculators have been waging an all-out war on the American dollar. The strength of a nation’s currency is based on the strength of that nation’s economy – and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators.

I have directed Secretary Connally to suspend temporarily the convertibility of the American dollar except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.

It turns out that such intervention was actually counterproductive to the stated aims, so we are tempted to suspect that a different set of aims was met instead.   read more »